Printing Profits in 3-D

06/18/2013 8:00 am EST

Focus: OPTIONS

As the Fed slowly dials back on QE3, Andrew Giovinazzi of OptionPit.com offers a trade idea based on the expectation that there will be a lot of sharp short-term moves.

As a young floor trader back in the old paper days, there was always a need to put the trades on the “tape.” As in “the customer needs to see a print.” Hard to believe that it was such a big deal but at that time electronic execution was in its infancy. Back then traders did not want to be “on the wheel” because markets were updated by open outcry and the automated update systems were still having the kinks worked out. A print now takes on a whole new meaning. We can print things in 3D and the days of worrying about a trade hitting the tape on time are long since passed.

A stock I watch is 3D Systems (DDD). It is one of the darlings of the 3D printers and is recently trading at a near-term high, if not close to an all-time high. That is a confluence of a couple of good things.

  1. Relatively cheaper IV

  2. Market complacency as a stock sits at near all-time highs

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Take a look at the tape over the last couple of days. $45-$49 in a jiffy, and there is probably plenty of more movement to come.

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The market has had an uptick in volatility lately, and we have avoided most short gamma for a while. The Fed will slowly back out of the market, and I think that will make for some hairy short-term moves. A stock like DDD should move right along with it.

The Trade
I like a ratio put spread in DDD in July. The IV is at the lower end of the range, and I think a spread like that could be entered and exited within a week. It would be on the order of long some Jul 46 puts and short fewer Jul 50 puts. so net long puts DDD has earnings after Jul expiration, but I don’t think you will need to hold it that long. The trade is biased to the downside and the call ratios don’t look that great.

By Andrew Giovinazzi, Chief Options Strategist, OptionPit.com

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